US Industrial Production Slows

Industrial production slowed to a 0.1% pace in October following September’s 0.6% (revised from 0.7%) increase. A somewhat stronger 0.4% rise had been expected. Manufacturing declined 0.1% following three consecutive monthly increases. A sharp decline in motor vehicles and parts (-1.7%) weighed on manufacturing output with the 0.2% monthly rise in machinery insufficient to offset the weakness. While motor vehicle assemblies slowed to 6.98 million annualized units from September’s 7.27 million, they remain above August’s level. Although the mining sector dipped 0.2%, utility output increased 1.6% on strength in both electricity (+1.7%) and natural gas (+1.3%) production.

Capacity utilization rose for the fourth consecutive month in October, reaching 70.7%. Although slightly below the expected 70.8%, the measure has made steady upward progress since reaching a low of 68.3% in June of this year.     

Despite the slowing in industrial production in October, we expect economic growth for the fourth quarter overall to remain in positive territory as the U.S. economy continues its recovery. The pace will likely slow somewhat to a 2.4% annualized pace. Despite the return to positive growth, considerable economic slack should keep core inflation on a downtrend.

Although today’s report shows a rise in capacity utilization, the measure remains at a low level. Additionally, the high unemployment rate is indicative of labour market slack. The low rate of gains in producer prices also points to subdued pipeline pricing pressures. In light of the absence of inflationary pressures and the need for improved conditions in labour markets, we do not expect the Fed to begin increasing its Fed funds rate from its current 0.00%-0.25% range until the fourth quarter of next year.  

Producer price index —In another report released earlier this morning, the producer price index rose 0.3% in October compared to the 0.5% rise expected. Both gasoline (+1.9%) and food (+1.6%) pushed the headline rate above September’s -0.6% pace. The core rate, which excludes food and energy, declined 0.6% on the month, marking its fastest fall since July 2006. Expectations within financial markets had been for a 0.1% rise in October. The drop was led by new model year vehicle prices as passenger car prices declined 0.5% and prices for light trucks fell 5.2% on the month. The annual rate for core producer prices is now 0.7%, its slowest rate since March 2004.